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Industrial Deregulation, Skill Upgrading, and Wage Inequality in India

Author

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  • Rubiana Chamarbagwala

    () (Indiana University Bloomington)

  • Gunjan Sharma

    () (University of Missouri)

Abstract

We investigate the relationship between economic deregulation (delicensing), skill upgrading, and wage inequality during the 1980s and 1990s in India. We use a unique dataset on India's industrial licensing regime to test whether industrial deregulation during the 1980s and 1990s played a role in generating demand for skilled workers, as measured by the employment and wagebill shares of white-collar workers, and in raising the returns to skilled labor, as measured by the skill premium. Our analysis focuses not only on the difference between licensed and delicensed industries but also on the comparison of these differences during the 1980s, when India's external sector remained relatively closed to the world economy, and the 1990s, when India underwent massive liberalization reforms and became increasingly integrated with the global economy. We identify two main channels through which industrial delicensing affects the demand for skills and wage inequality: capital- and output-skill complementarities. Our analysis finds two important results. First, capital- and output-skill complementarities existed for firms in both licensed and delicensed industries but were stronger in delicensed industries both before and after 1991. The exception is output-skill complementarities with respect to the skill premium, where delicensed industries experienced lower output-skill complementarities compared to licensed ones both before and after 1991. Second, the contribution of industrial delicensing to both types of complementarities was considerably higher during the 1980s and much smaller after 1991. These results suggest that industrial delicensing benefited skilled labor via capital- and output-skill complementarities during the 1980s, the decade before India liberalized it's trade and investment regime. Thus, much of the increase in the demand for and returns to skill as a result of capital- and output-skill complementarities can be attributed to domestic reforms during the pre-1991 period in India.

Suggested Citation

  • Rubiana Chamarbagwala & Gunjan Sharma, 2008. "Industrial Deregulation, Skill Upgrading, and Wage Inequality in India," Caepr Working Papers 2008-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  • Handle: RePEc:inu:caeprp:2008-002
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    References listed on IDEAS

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    Cited by:

    1. Furuta, Manabu, 2016. "Trade Liberalization and Wage Inequality in the Indian Manufacturing Sector," MPRA Paper 73709, University Library of Munich, Germany.

    More about this item

    Keywords

    Capital-skill complementarities; industrial delicensing; trade liberalization; India;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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